_SM.png "FTSE 100 chart")
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Price action is the most crucial thing in trading, with the movement of the price ultimately dictating whether a trade is won or lost. While some will get caught up in the use of increasingly complex indicators, there are many who believe that the price is the only thing you need to tell whether a market is likely to go up or down. The utilisation of drawing tools such as trendlines, horizontals, and Fibonacci retracements are often employed as a means to supplement the purely visual price action. Through the study of key swing highs and swing lows, it is possible to analyse trends and place trades in favour of that trend. You can also use price action to spot and trade market reversals. Add to that the ability to find tradeable patterns, and it is clear that price action alone can provide all you need as a trader.
Trend following retracement entry
The first strategy is related to playing the trend. On this occasion, we have a clear downtrend in play, with lower highs and lower lows being created. The key swing highs and lows are circled accordingly. As long as we do not see the most recent swing high broken, the downtrend remains in play.
By using the Fibonacci retracements, you can look for short positions at a beneficial price. Here we can see that each pullback hit the 50% retracement, three of the four hit the 61.8%, and two of the four retraced 76.4%. Given the fact that we would need to see a break back above the previous swing high to negate the trend, that’s where we would put our stops. Thus the deeper the retracement, the smaller the potential loss (closer stop loss). As such, taking trades at either the 61.8% or 76.4% would have been very profitable on this occasion. Ultimately, the trend is negated at the bottom right, when the price breaks above the 7911 swing high.
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